NJ Still Drowning in 'Underwater' Mortgages, New Study Reveals

While foreclosure rates fall in other parts of country, New Jersey on track for another 50,000 filings this year

Homeowners have it worse in New Jersey cities than almost anywhere in the nation, according to a new study of “underwater” mortgages, those with debt loads higher than the properties actually are worth.

More than 50 percent of Newark and Elizabeth mortgages are underwater, trailing only Hartford, CT, among cities with more than 100,000 residents. Paterson is fourth at 49 percent, just ahead of Detroit. Jersey City ranks 32nd, according to the report, “Underwater America,” by a team of urban planners and sociologists from Occidental College, George Washington University, The New School, MIT, and the Nathan Cummings Foundation and published by the Haas Institute at the University of California-Berkley.

While foreclosure rates are dropping sharply in some parts of the country, New Jersey continues to buck the trend, on pace for more than 50,000 new filings this year. Authors of the study pointed out that homeowners with “negative equity” are two to three times more likely to default on their loans.

They offered several other insights to the Garden State’s continuing crisis. They found underwater mortgages are especially prevalent in communities targeted by predatory lenders, often those with large minority populations, as well as in areas where housing prices have not rebounded from the Great Recession.

Like the New Jersey cities, most others on the worst-off lists have more than 40 percent minority populations. Meanwhile, New Jersey remains an expensive place to buy a home, but the state ranks 48th in the nation in the post-recession recovery of residential property values.

While the business media have focused on the national average, “that’s a very misleading and in some ways destructive way of looking at the situation,” said Peter Dreier, one of the authors and chair of Occidental’s urban and environmental housing department. “That housing recovery is bypassing many cities and neighborhoods.”

In many areas, “people are drowning in debt and they are not getting better,” Dreier said, since lenders largely have refused to write-down mortgage principal to reflect actual property values. Foreclosures have put large numbers of vacant homes in the hands of banks or investment groups who are in no hurry to resell or maintain them while waiting for prices to rise, he said.

“That takes money away from local families and the local economy and costs the cities tax revenue,” Dreier said. “At the same time, it hurts their budgets by increasing costs for crime prevention and public health and safety.”

“The foreclosure crisis has crippled many of Elizabeth’s hard-working families,” said city Mayor Chris Bollwage. “For the last six years the stock of bank-owned properties has soared. Now we’re left to deal with the consequences and the costs.”

When the data is broken down by ZIP Code for neighborhoods with at least 5,000 residents, other New Jersey communities join the struggling cities. Trenton puts two neighborhoods in the bottom 52, while Roselle, Pleasantville, East Orange, Irvington, Plainfield, Browns Mills and Perth Amboy all have underwater rates well above 40 percent of mortgages.

While such “hot spots” stand out, Dreier and another author, Saqib Bhatti of the New York-based Cummings Foundation, pointed out that problem areas are found throughout the nation.

Looking at metropolitan areas of more than 1 million population, the report shows areas initially hard hit by the bursting of the mortgage bubble continue to stagger years later. The worst off zip codes are clustered around Atlanta, Chicago, Detroit, Las Vegas, and the Baltimore-Washington, D.C., corridor, scattered through California, Florida, New Jersey, and Arizona, and spotted primarily in urban areas elsewhere across the county, according to the report.

The report also points to a lack of effective government policies and programs to help homeowners. Former Congressman Mel Watt, who became head of the Federal Housing Finance Agency in January, has not allowed the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac) to negotiate with borrowers, the authors said.

“He can do this voluntarily, he doesn’t need to wait for Congress to act,” Dreier said.

A ballyhooed $26 billion deal between major lenders and the federal government and most states, designed to settle claims of mortgage fraud, fell far short of its announced intent to help 1 million homeowners. More participants in the program actually lost their homes through deed surrenders or short sales, 182,728, than those who obtained first mortgage modifications or refinancings, 171,663.

In New Jersey, “I’ve introduced legislation to curb the foreclosure crisis three times in the last six years. And three times Chris Christie has vetoed it,” said Senator Raymond J. Lesniak (D-Union). “This crisis is not going away. New Jerseyans desperately need action at the state and local level to curb this problem and keep families in their homes.”

The report comes on the heels of one showing the amount of underwater homeowners nationally has declined sharply over the past year, to about 10 percent. But again, the news was not good for New Jersey. Black Knight Financial Services of Jacksonville, Fla., put New Jersey at number two for mortgage delinquencies, after Mississippi. It classified almost 13 percent of the state’s mortgage loans as “non current.”

If banks, investment pools and hedge funds were willing to maintain and promptly re-sell foreclosed properties, that would resolve the need for most cities to act according to Baltimore City Councilman Bill Henry, who participated in a press conference with Dreier and Bhatti.

But through his own dealings with the finance industry, Henry determined “they have absolutely no interest in that. They just want to hold these properties off the market until prices rise, they truly want to be speculators.”

A spokesman for Wells Fargo, the nation’s largest private mortgage lender, declined to provide numbers for mortgage modifications in New Jersey. But Kevin Friedlander, the bank’s northeast communications manager, said that since 2011, it has held four “face-to-face” events to assist borrowers in Hartford and three in Newark. Workshops are scheduled this summer in Elizabeth and Newark, he said.

Mary Szacik of New Jersey Communities United, who conducts clinics on fighting foreclosure and mortgage fraud for Essex County homeowners, said the government has prodded lenders into funding mortgage-counseling programs. But the efforts focus on behavior modification for borrowers, she said.

“They’re going to go through your budget and get rid of the cable TV,” Szacik said. “But there’s no behavior modification for predatory lending,” such as adjustable rate mortgages that balloon to the 15 percent to 20 percent interest rates seen in Irvington, she said.

“If the government is not going step up to the plate, and the mortgage holders are not going to step up, then local communities are going to be looking to take bold action,” Bhatti said, such as the pending plans in Irvington and Richmond, CA, to use eminent domain to acquire underwater mortgages and offer the borrowers better rates.

Newark Councilman Ras Baraka, a mayoral candidate who has supported an eminent domain option, said the report “makes clear that we are nowhere near ending the pain and devastation facing Newark residents fighting foreclosure. The Federal government’s efforts have failed homeowners, and the Christie administration has ignored the crisis in its entirety.”

But Henry cautioned that banks are not going to sit idly by if local governments take steps that affect their investments. After his city discussed eminent domain at a public hearing, the state Legislature has passed a bill that would bar the city from using it to help homeowners, Henry said. The bill is awaiting the signature of Maryland Gov. Martin O’Malley.

A city planning to take action to help its struggling homeowners would do well to emulate the approach being used by Richmond, Henry said. The blue-collar city on the San Pablo Bay hired a private firm, Resolution Mortgage Partners, which not only will manage its property acquisitions but defend them in court against expected challenges from banks.

Irvington Mayor Wayne Smith acknowledged that lenders may attempt to tie up local mortgage relief programs in court. But Irvington intends to incorporate its eminent domain program within a traditional use of the move, an urban renewal program to reduce blight, he said.

Courts nationally and in New Jersey have ruled governments have broad powers to use eminent domain to acquire property from unwilling sellers. In Hawaii Housing Authority v. Midkiff in 1984, the U.S. Supreme Court allowed the housing agency to take leases from property owners and then offer mortgages to the tenants.

Since the underlying legal issues already have been fought out and decided, Henry said the only question is applying those precedents to lenders. It is likely that only one city will face a protracted legal battle against banks over eminent domain, he said.

"It will only be expensive once if the courts rule the way we expect them to," giving communities a free hand to help homeowners with their mortgages, he said. "After that first case, all the others will fall in line."